What is a DAO? Learn what constitutes a Decentralized Autonomous Organization

What is a DAO? DAOs are horizontal organizations completely managed by computational algorithms - more specifically smart contracts, in the case of most projects. DAOs are not attached to any regulation or specific law, as of now, due to their nature prevents the organization from being referenced to a specific nation or territory.

Where did the concept of DAOs come from? In 1997, computer scientist and cryptographer Dilger de Werner coined the concept of a DAO in a series of academic papers where he compared the properties of a person’s immune system with that of an organization. De Werner’s ideas for a decentralized organization only left the paper almost two decades later, as the time didn’t allow for the necessary technology to develop such a self-sustainable system.

How do crypto DAOs work? Crypto DAOs must have the ability to execute its operations autonomously, have a blockchain consensus protocol to ensure democratic resolution and community development and of course, a crypto token as a source for funding, trade and governance.

Pros and Cons of DAOs

Pros: Create worldwide organizations with little hassle beyond computing knowledge, provide financial services globally and acquire funding through crypto tokens.

Cons: No territory as of yet has regulatory oversight for DAOs to become legitimate through their eyes, security issues are very frequent and require expert programming, therefore the knowledge barrier of computer science can be an issue without a great professional in the initial team.

Over the past couple of years, the term DAO - Decentralized Autonomous Organization - has been spread across the crypto ecosystem for a number of reasons; new crypto projects emerging, investment opportunities, a novel structure for companies to base on, the jobs of the future, and more.

But what is a DAO, exactly? What constitutes one, and what are the perks (and challenges) involved with them? In this article, we explain what a DAO is and the main characteristics of this new form of organizational structure.

What is a DAO?

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Meaning Decentralized Autonomous Organization, DAOs are horizontal organizations completely managed by computational algorithms - more specifically smart contracts, in the case of most projects. DAOs are not attached to any regulation or specific law, as of now, due to their nature prevents the organization from being referenced to a specific nation or territory. Workers are completely remote and can conduct their duties from anywhere in the world, while developments and integrations to the structure are voted on and accepted by the community as a whole.

Although the term has been broadly used over the past few years as DeFi projects have gained massive popularity, what truly makes for a legitimate DAO is its transparency when it comes to processes and the smart contracts that manage the foundation. A crypto project that uses smart contracts as part of its structure but has a clear management team making most decisions instead of a democracy-based community, for example, is not entirely a DAO. True DAOs are fully decentralized, with all changes and new projects being discussed openly for all members - and even outsiders - to see.

Where did the concept of DAOs come from?

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Most people agree that the very first notion of a DAO came from the Ethereum blockchain, as it was the cryptocurrency that gave birth to the concept of smart contracts and their applications that eventually led to the popularity of all crypto financial services and organizations.

Although a reasonable presumption, it is actually incorrect; the concept of DAO came much earlier, even earlier than crypto itself. In 1997, computer scientist and cryptographer Dilger de Werner coined the concept of a DAO in a series of academic papers where he compared the properties of a person’s immune system with that of an organization. In these papers, de Werner defined the basis for a DAO as a self-sustainable system of detecting flaws and searching for improvement through a horizontal hierarchy of needs and resources. Seems like a truly wild concept for the time, and it was. De Werner’s ideas for a decentralized organization only left the papers almost two decades later, as the time didn’t allow for the necessary technology to develop such a self-sustainable system. Eighteen years after Dilger de Werner coined the term came his long-awaited technology; the Ethereum blockchain, and its smart contracts.

How do crypto DAOs work?

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Decentralized Autonomous Organizations rely on a series of mechanisms to ensure their operation at all times, throughout the globe. The first feature that every DAO must have is the ability to execute its operations autonomously. Whether the market is doing well or not, raining or sunny, with more or fewer contributors active, a DAO must be able to execute its smart contracts and continue with operations as usual. If an organization is decentralized but requires continuous monitoring and oversight of developers or community members to function with its basic parameters, it is not a DAO.

Secondly, it needs a consensus protocol, which ensures that the decisions made within the organization are not only able to be executed but also comply with the democratic structure of community members holding their votes equally within the structure of the ecosystem. Without a consensus mechanism, it is virtually impossible for a DAO to operate as intented - not to mention the several security breaches it may ensue otherwise. For instance: without a secure consensus protocol, members of the community may be able to overtake the development and turn any voting in their favour.

Lastly but just as important, and the most popular one: crypto DAOs need a token to be used as their trade and governance mechanism. Every single crypto DAO, legitimate or not, has one - it provides the project with most of its funding through independent investors, the financial incentive for them to keep holding (staking, yield farming) and also has several options for governance mechanisms. The most popular one is staking governance. In a nutshell; the more tokens you have staked in the network, the stronger votes you have on the changes. It is also used, of course, to pay community members.

Pros and Cons of DAOs

Despite being a novel organizational structure with plenty of perks and technological innovation, that doesn’t mean that DAOs can be used for everything.

Here are a few pros and cons of DAOs.

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Pros

With DAOs, you are able to create organizations without much hassle beyond the computational knowledge required, plus leaving the traditional structure of a heirarchy behind. Full decentralization is also one of its main perks, with the company being able to offer its services worldwide and have contributors from anywhere across the planet. Also, decentralization with crypto tokens allow for an easy and non-bureaucratic manner to get funding and gain traction in the financial ecosystem.

Cons

The biggest issue is regulation. Yes, you can provide services to crypto users across the world, but how about entering the traditional markets? At the time of this writing, there aren’t official frameworks in any territory regarding DAO usage, taxing, cybersecurity and more. Which brings us to the second issue, which is security; a DAO has to be foolproof against any sort of hacking or security breach - and that is an extremely tough feat to accomplish. Therefore, the third con is that DAOs are extremely difficult to program. That might not be the case for computer scientists and software developers who are already familiar with cryptography and blockchain tech. However, if you’re looking to immerse yourself in decentralized financial services in the fastest way possible, you’ll either need a cryptography expert on your initial team or learn it yourself.



Author: Gate.io Researcher: Victor Bastos
* This article represents only the views of the researcher and does not constitute any investment suggestions.
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